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The Dark Side of the Fiscal cliff deal

By On January 8, 2013 Under Uncategorized

The US government under the debt ceiling law can only incur a debt of up to $16.39 trillion and considering that the Treasury is expected to hit this capacity at some point in 2013, it means that economic performance needs to be reexamined. There are fears by economic analysts that any protracted debate on debt limit or ceiling could cause troubles such as those witnessed in debt battle in 2011 summer.

The debt battle witnessed in summer 2012 flustered financial markets, something that increased the Treasury borrowing by $1.3 billion for the fiscal year 2011. Whereas there are positive features and expectations of the fiscal cliff law, there is the dark side of the bill. The bill will save the low and middle-income earners from taxation hikes meaning that this population, which is feeling the hitch of aftermath of economic recession, has been saved from increase in taxation.

The fiscal cliff bill seems to target wealthier class and it has been cited to affect the US economic performance in various ways. Although personal income tax has been spared for the low and middle class citizens, the payroll taxes will have to go up for event American worker.

The fiscal cliff law allows the 2 percent payroll tax cut to expire meaning that it will switch from 4.2 to 6.2 percent. An average household who earns $50,000 annually will have to part with more than $1000 annually in payroll taxes. What this means is that US consumers will be deprived more than $115 billion, which could have featured as disposal income for spending in the year 2013.

In addition, this bill did not touch major issues on the Obama healthcare tax legislation, which is said to affect the middle class. However, considering that the middle class has been given a relief in this law especially on income taxation, the healthcare tax legislation may not be a thorny issue.

High-income earners will have the bear the burden as income tax rates will increase. This is expected to hurt many small business especially those that stream in an income of more than $400,000 annually. There may be many changes in small businesses and it is projected that redundancies may be witnessed as some in some of these businesses they try to cut down costs that have been brought about by the increased taxation.

Although the top income tax rate is expected to move from 35 to 39.6 percent, this figure may even be higher because if other federal and state taxes are factored in, the top margin will increase and could even hit 50 percent for some businesses. Worse still, there is an also undesirable expectation on the US national debt, which is set to increase by 4 trillion dollars within the next decade.

The passing of fiscal cliff bill may not have examined the spending cuts in depth. There are hardly any spending cuts in this bill and analysts have calculated a 41 to 1 ratio of tax increase to spending cuts in the bill. This means that the bill could have concentrated more on tax increases compared to cutting spending. In addition, the debt ceiling is expected to bring trouble to the US government considering that as per the law, the government cannot surpass the set $16.39 trillion figure.

It is projected that in 2013, Treasury may hit this figure and if there would have been no changes in the law, it means that the government may not be able to borrow when the figure is reached. The fiscal cliff deal is thought to increase borrowing by the US government, something that will have impact on the economic performance. The battle over debt ceiling will have to be fought by the Congress. Contributions to this article were provided by the editorial team at internet loan guide a leading consumer driven website that helps borrowers make informed financial decisions and helps provide editorial analysis and writing for a variety of topics in the credit cards, finance, personal loan and mortgage industry. The battle for the fiscal cliff may be over, but the war on the debt ceiling is likely just begining.

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